His portfolio is built on the largest companies in America.
Thanks to his long-term oriented, value-seeking investment method, Warren Buffett’s wealth has catapulted from a mere $6,000 when he was 15 years old to an astounding $73 billion-plus today.
While Buffett’s concentration is on the largest of the large-caps, he has a love for the potential of small-caps, defined as companies with market capitalizations between$300 million to $2 billion.
A little while ago he told Fortune Magazine, “It’s one thing to own stock in a Coca-Cola or something, but when you are actually in the business of making determinations about opening stores and pricing decisions, you learn from it. We have made a lot more money out of See’s than shows from the earnings of See’s, just by the fact that it has educated me.”
How Warren Buffett Picks His Winners
It’s safe to say Warren’s consultation fee is among the most expensive of all time. People routinely spend a million plus dollars just to have an informal lunch with the guru. Astoundingly, the latest bid posted at $2.7 million for an hour or two of his time.
But you don’t need to shell out the price of a private island to find small-cap stocks Buffett would buy. The investing legend freely provides his investing guidance and strategy to anyone with the gumption to look.
For almost thirty years, he has written an annual investor letter outlining his ideas for the year, there are multiple books focused on his core philosophy, and Buffett is known to be open about his investing influences in interviews. These sources reveal a few common themes.
Just like “location, location, location” is the mantra for real estate investors, “value, value, the value” could be the three words describing Buffett’s investing thesis. Buffett points at Columbia University professors Benjamin Graham and David Dodd as his primary influencers. Specifically, the professors’ famous stock market book Security Analysis, which was one of the first works describing value investing.
At its core, value investing is buying cheapened stocks according to an analysis of the balance sheet. Stated simply, shares are purchased at a discount to their actual worth. It doesn’t matter if the companies are large-cap or small-cap, his investing thesis remains the same.
Another crucial concept of Buffett’s investing thesis is an economic moat. Moats are especially critical for small-cap stocks, due to the inherent volatility in the small-cap stock sector.
Buffett explained the value of a moat in his 2007 Berkshire Hathaway shareholder letter:
“A great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning a formidable barrier such as a companies being the low-cost producer or possessing a powerful world-wide brand is essential for sustained success.”
Here are 2 small-cap stocks Warren Buffett would love: